The computer implemented method and system disclosed herein, in general, pertains to developing cost effective methods that can be implemented by tax collection agencies to verify tax revenues for individuals, landlords, and businesses. Furthermore, the computer implemented method and system disclosed herein lays the foundation for allowing government agencies to build a centralized database to determine who resides in a country.
Typically, individual tax payers and businesses do not provide sufficient information to determine whether they are complying with tax laws. Unless each individual tax payer, landlord and business is audited, cost effective methods do not exist to identify fraudulent tax returns and or to ensure that individuals, landlords, and businesses are in compliance with tax laws.
Historically, tax collection agencies rely upon individuals and businesses to accurately report income and deductions. Since tax collection agencies depend upon the honor system for certain individuals and businesses to report their taxable revenues and expenses, information that is required to verify some of this information may not be easily available. Landlords, tax evaders, and general contractors are notorious for not reporting all their taxable income. Since landlords know that tenants do not report their monthly rental payments, some landlords know that they can probably underreport some or all their rental income. To reduce the amount of money that has to be reported for a work project, some contractors ask landlords to pay for part of the work project with cash. If a contractor receives cash, he may be tempted not to report that income. Since tax collection agencies do not have the manpower or the tools to verify the deductions for landlords, some landlords may attempt to claim fraudulent business deductions.
Unless an individual or a business is audited and investigated, a tax collection agency does not know whether or not the income and deductions are accurate. Since tax collection agencies do not have the resources to audit every tax return, the possibility exists that individuals and businesses may submit fraudulent claims knowing that tax collection agencies may not be able to audit or verify their tax returns. For example, in fiscal year 2006, the internal revenue service (IRS) was only able to audit 257,000 individuals with incomes over $100,000 and to audit 17,015 individuals with incomes over $1,000,000.
As a landlord, the landlord simply has to state the amount of rental income for each rental property in his/her tax return forms. Tenants do not have a way of reporting to a tax collection agency their payments to landlords. Since a mechanism does not exist to verify the rental income that has been reported by landlords, the possibility exists that some landlords may intentionally underreport rental income. Since many individuals know that tax collection agencies cannot easily identify them or since employers will not report employees that are not officially on their payrolls, many tax avoiders do not feel compelled to comply with the tax law.
One of the biggest deductions for landlords involves renovations and repairs for rental properties. Even though landlords report that payments were made for these repairs and renovations, cost effective methods do not exist to confirm that the landlords have actually paid for these services. Basically, tax collection agencies rely upon landlords for accurate reporting for such payments.
Under the existing taxation system, tax collection agencies assume that every business will file a W-2 form for each employee and every eligible individual receives a W-2 form. If a business submits a W-2 form for an employee and the employee does not file a tax return, the tax collection agency should detect the non-filing as a problem. If an employee files a tax return and the employer does not submit a W-2 form for the employee, the tax collection agency should detect this as a problem with the employee or the employer. However, if the employee does not file a tax return and the employer does not submit a W-2 form for the employee, it is highly likely that tax collection agencies would not be able to detect the non-compliance of the employer and the employee with the tax law.
When a house is placed into service as a rental property, tax collection agencies rely upon landlords to provide a brief description of the rental property. In certain localities, landlords have been known to convert dwellings into illegal housing. Many communities complain that landlords convert single family and multi-family houses into boarding houses. Some of the landlords even convert basements and attics into illegal apartments. Since tax collection agencies do not have the ability to confirm the actual number of apartments at rental properties, the possibility exists that landlords do not report all the income for apartments on a rental property. To allow tax collection agencies to collect all the tax revenues that are due on a rental property, there is a need for identifying all the individuals and businesses that are failing to comply with the tax laws.
Individuals and businesses avoid complying with the tax laws by “working off the books” or by using another person's tax identification number. If that person is “working off the books”, or resides in the country illegally, the probability is very high that tax collection agencies are not aware of that person and the employer who is not accurately reporting revenue.
Another problem for tax collection agencies arises from landlords who do not accurately report deductions and vendors who do not accurately report revenues generated in the housing industry. With the existing taxation system, landlords state the expenses that were paid to vendors, for example, general contractors, plumbers, electricians, landscapers, etc. Unless audited, landlords are not required to submit any type of proof of income received or expenses on a tax return. It is possible that a landlord could claim a deduction for a business that did not provide any type of service, or the claimed deduction could be more than what the landlord or homeowner paid for the service. Unless a landlord's tax return is audited, tax collection agencies are not able to confirm that a landlord's deductions are accurate. Since a very small percentage of tax returns are audited and landlords know that their chances of being audited are small, the probability of unscrupulous landlords providing inaccurate information is high.
Another problem for tax collection agencies arises from vendors, for example, general contractors, plumbers, electricians, etc., who do not accurately report all their revenue from the home construction and renovation industry. Under the existing taxation system, a vendor needs to state the vendor's revenue and business expenses. However, enough information is not provided on the tax returns to confirm revenues and expenses. Unless a vendor is audited, a vendor does not have to provide any details on how the revenue was generated. Since the probability of facing an audit is very low, the vendor may choose to underreport the revenue from some or all of the vendor's jobs.
The major responsibility of the census bureau is to enumerate the population of a country periodically. For example, the United States census bureau enumerates the population of the United States every 10 years. The results of the enumeration are used to determine the allocation of congressional seats allowed for a state in the House of Representatives, the distribution of electoral votes, the distribution of funds for government programs, etc. In the past, many states and communities have complained that the results of the enumeration were not accurate. One of the reasons for the complaints is that census enumerators may not have been aware of illegal apartments or the number of people at a dwelling.
Typically, tax collection agencies verify taxes manually, on paper. However, traditional methods of paper documentation have been found to be inadequate, unreliable and prone to manipulation by the tax payers as well as the tax collection agencies. Moreover, a manual verification of tax information carried out by the tax collection agencies opens the possibility of transcription and evaluation errors by tax examiners of the tax collection agencies. Furthermore, the existing taxation system does not allow quick and efficient collection of tax information from tax payers. The speed of processing and evaluation of the tax information is impeded by the great volume of information that needs to be processed. Moreover, if the tax examiners find discrepancies in the tax information submitted by the tax payers, there is a substantial delay in notifying the tax payers, which may be followed by delays in subsequently receiving a clarification or requests to correct errors in the submitted tax information, etc.
Conventional tax forms, for example, the Minnesota property tax form, for verifying information declared on a property by a tax payer, examine the tax information collectively for an entire household unit. This collective examination allows the possibility of manipulation of the tax information by the tenants and the landlords, for example, by reporting only a partial income or payment. Further, this collective examination may limit accurate population count estimation, and per capita income estimation, since the tax information is generally considered as an important input for completing population count estimation.
Moreover, conventional tax forms provide static interfaces and formats that are designed with a fixed set of fields that mandate all tax payers to report tax information in accordance with the requirements set by the fields. Some of the tax information requested from the tax payer may not be relevant or applicable to a specific tax payer since the tax information may not be applicable to the financial or demographic profile of the tax payer. This results in additional processing of redundant tax information that is uneconomical, slow, and places an unwarranted burden on both the tax payer and the tax collection agencies.
Hence, there is a long felt but unresolved need for a computer implemented method and system that verifies tax liability and tax deductions reported by taxable entities, for example, tax payers in a secure electronic environment. Moreover, there is a need for a computer implemented method and system that systematically organizes tax information and allows speedy access of the tax information from a database. Furthermore, there is a need for a computer implemented method and system that determines associations between taxable entities, performs electronic verification of tax information reported by each of the taxable entities, notifies the taxable entities of errors found in the tax information, in addition to allowing the taxable entities to update the tax information if there are errors in the tax information. Furthermore, there is a need for a computer implemented method and system that dynamically generates tax forms based on the financial or demographic profiles of the taxable entities.